Despite Debt Deal, Greece Set to Default

Merkel and Sarkozy’s window dressing appearances were only that. No aid package will save Greece from defaulting. Lining up now Portugal, Spain and the U.S.

Reuters
July 25, 2011

Moody’s cut Greece’s credit rating further into junk territory on Monday and said it was almost certain to slap a default tag on its debt as a result of a new EU rescue package.

It was the second rating agency to warn of a default after euro zone leaders and banks agreed last week that the private sector would shoulder part of the burden of a rescue deal that offers Greece more cash and easier loan terms to keep it afloat and avoid further contagion.

“The announced EU program along with the Institute of International Finance’s statement implies that the probability of a distressed exchange, and hence a default, on Greek government bonds is virtually 100 percent,” Moody’s said in a statement.

Bank lobby IIF, which led private sector negotiations, aims to attract 90 percent investor participation in the bond exchange plan which comes on top of the EU’s new 109 billion euro bailout.

Moody’s cut Greece’s rating by three notches to Ca, just one notch above default, to reflect the expected loss implied by the proposed debt exchanges.

Greece now has the lowest rating of any country in the world covered by Moody’s, which, like Fitch last week, said it would review Greece’s rating after the debt swap is completed.

“Once the distressed exchange has been completed, Moody’s will reassess Greece’s rating to ensure that it reflects the risk associated with the country’s new credit profile, including the potential for further debt restructurings,” it said.

However, whereas Fitch pledged to quickly give Greece a higher, “low speculative grade” after its bonds had been exchanged, Moody’s said it could not forecast when the rating would change or how.

“It all depends how quickly the debt exchange takes place,” said Alastair Wilson, Moody’s Managing Director for EMEA Credit Policy. “Once we have greater visibility over that, we will reassess the credit profile quite quickly. Whether the rating will change, that’s a different question,” he told Reuters.

A senior EU official said on Saturday that the aim was to start a voluntary swap of privately-held Greek bonds in late August and conclude it in early September [ID:nLDE76M02I]

Greek bank shares and the broader stock market were unfazed by Moody’s action. Analysts said the downgrade and the default warning were priced in and less worrying following assurances provided by the EU deal.

“The EU Council last week effectively secured Greek banks’ continued access to ECB liquidity, even in the case that PSI (private sector involvement) triggers a selective default,” said Platon Monokroussos, an economist at EFG Eurobank.

The government has repeatedly criticized ratings firms for their downgrades and its spokesman threatened on Monday to end its subscriptions to these agencies as the new rescue package means Greece will not issue new bonds for years.

“All governments pay a subscription to these agencies. We, I think, do not need the reviews anymore. They have no practical value,” Elias Mosialos told Radio 9. “Perhaps the finance ministry should end its subscription.”

CONTAGION CONTAINED … FOR NOW

Moody’s said it would take into account the possibility of a second default while reassessing Greece’s rating.

“Our experience is that relatively small restructurings have often been followed by deeper defaults,” Wilson said, adding that he could not say if this would be the case for Greece.

The rescue package for Greece benefits other euro zone countries by containing near-term contagion risks but it was not necessarily positive in the longer run as it set a precedent for private sector involvement in rescue deals, Moody’s said.

“The support package sets a precedent for future restructurings should the finances of another euro area sovereign become as problematic as those of Greece. The impact of Thursday’s announcement for creditors of Ireland and Portugal is therefore likely to be credit-neutral,” it said.

The cost of insuring most peripheral euro zone government debt against default rose on Monday on market doubts that the fresh aid package for Greece agreed last week will protect bigger economies from contagion.

Standard & Poor’s and Fitch rate Greece CCC, broadly in line with Moody’s rating. S&P has not yet said how the EU summit deal will affect Greece’s rating.

U.S. Raised Debt Ceiling 102 Times

RT
July 17, 2011

President Obama has warned the US is running out of time to deal with its financial troubles – the Congress must raise the current $14.3-trillion debt ceiling again. And as Professor Rodrigue Tremblay told RT, this has become a tradition in the US.

­The US repeatedly gets away with raising the debt ceiling, Rodrigue Tremblay told RT.

“This system that the US has, has been in place since 1917. They raise the debt ceiling each year, they have done it 102 times; eight times under George W. Bush alone. Most countries do not run their governments this way. In the US it is always a mess,” stated Tremblay.

The professor of economics at the University of Montreal says the US is actually the country with the highest debt, and not Greece. But Washington will never be in line for a bailout, he adds.

“The US is not in the same position as other countries because their currency is used internationally and therefore they can afford to print more dollars than the Euro or any other currency can,” said Tremblay. “The main problem in the US is that there seems to be no one in charge in Washington. President Obama is a lame duck president and does not control the government; and the Republicans control most of the Congress.”

Many Republicans are unhappy with Obama’s plan to reduce the budget deficit. But despite that the debt ceiling will be raised no matter what, Tremblay believes.

“President Obama has a tradition of giving in to the demands of the Republicans. He did it twice before, so the Republicans are expecting him to do the same again. I do not doubt for a moment there will not be a default in America,” Tremblay told RT.

He also pointed out the Republicans are very keen to oppose President Obama and his Democrats on this matter even though the situation might seem too serious for these party political games.

“There are 16 new members of the Republican party in the House of Representatives, and these are tea-baggers, members of the Tea Party. They are not really Republicans, they are outcasts. They do not want to have any tax increase whatsoever, instead they vote for wars,” concluded Tremblay.

Obama Plays Financial Terrorism, threatens Social Security

ABC
July 12, 2011

President Obama on Tuesday said he cannot guarantee that retirees will receive their Social Security checks August 3 if Democrats and Republicans in Washington do not reach an agreement on reducing the deficit in the coming weeks.

“I cannot guarantee that those checks go out on August 3rd if we haven’t resolved this issue. Because there may simply not be the money in the coffers to do it,” Mr. Obama said in an interview with CBS Evening News anchor Scott Pelley, according to excerpts released by CBS News.

The Obama administration and many economists have warned of economic catastrophe if the United States does not raise the amount it is legally allowed to borrow by August 2.

Lawmakers from both parties want to use the threat of that deadline to work out a broader package on long-term deficit reduction, with Republicans looking to cut trillions of dollars in federal spending, while Democrats are pushing for a more “balanced approach,” which would include both spending cuts and increased revenue through taxes.

The Debt Limit fight: A primer

Democratic and Republican lawmakers are expected to hold another round of negotiations with Mr. Obama at the White House Tuesday afternoon on long-term deficit reduction, though talks have yielded little results to date.

Mr. Obama told Pelley “this is not just a matter of Social Security checks. These are veterans checks, these are folks on disability and their checks. There are about 70 million checks that go out.”

The interview will air Tuesday evening on the CBS Evening News with Scott Pelley.

Mr. Obama’s comments followed remarks from the Senate’s top Republican, who said Tuesday that he did not see a way for Republicans and Democrats to come to agreement on meaningful deficit reduction as long as Mr. Obama remains in office.

“After years of discussions and months of negotiations, I have little question that as long as this president is in the Oval Office, a real solution is probably unattainable,” Senate Republican Leader Mitch McConnell said in remarks on the Senate floor.

Still, McConnell said Republicans would “do the responsible thing” to avoid default, suggesting that a deal on the debt ceiling could be reached without a “real” deficit reduction package.

“The president has presented us with three choices: smoke and mirrors, tax hikes, or default. Republicans choose none of the above. I had hoped to do good, but I refuse to do harm. So Republicans will choose a path that actually reflects the will of the people, which is to do the responsible thing and ensure that the government doesn’t default on its obligations,” he said.

Mr. Obama has repeatedly said he wants a deal that would allow the U.S. to avoid confronting the issue again until after the 2012 elections and vowed on Monday that he would “not sign a 30-day or a 60-day or a 90-day extension.”

“This the United States of America and, you know, we don’t manage our affairs in three-month increments. You know, we don’t risk U.S. default on our obligations because we can’t put politics aside,” Mr. Obama told reporters at the White House yesterday.

Fed’s Massive Stimulus Had Little Impact: Greenspan

CNBC
June 30, 2011

The Federal Reserve’s massive stimulus program had little impact on the U.S. economy besides weakening the dollar and helping U.S. exports, Federal Reserve Governor Alan Greenspan told CNBC Thursday.

In a blunt critique of his successor, Fed Chairman Ben Bernanke, Greenspan said the $2 trillion in quantative easing over the past two years had done little to loosen credit and boost the economy.

“There is no evidence that huge inflow of money into the system basically worked,” Greenspan said in a live interview.

“It obviously had some effect on the exchange rate and the exchange rate was a critical issue in export expansion,” he said. “Aside from that, I am ill-aware of anything that really worked. Not only QE2 but QE1.”

Greenspan’s comments came as the Fed ended the second installment of its bond-buying program, known as QE2, after spending $600 billion. There were no hints of any more monetary easing—or QE3—to come.

Greenspan said he “would be surprised if there was a QE3”  because it would “continue erosion of the dollar.”

The former Fed chairman himself has been widely criticized for the low-interest rate policy in the early and mid 2000s that many believe led to the 2008 credit crisis.

Bernanke, who took over for Greenspan in 2006, began implementing the quantitative easing program in 2009 in an attempt to unfreeze credit and prevent a collapse of the US financial system. The strategy has gotten mixed reviews so far.
On Greece, Greenspan a default is likely and will  “affect the whole structure of profitability in the U.S.” because of this country’s large economic commitments to Europe, which holds Greek debt. Europe is also where “half the foreign [U.S.] affiliate earnings” are generated, he added.

“We can’t afford a significant drop in foreign affiliate earnings,” Greenspan said.

Greenspan was also pessimistic about the U.S. deficit talks, saying he didn’t think Congress would reach an agreement on raising the debt ceiling by the Aug 2 deadline.

“We’re going to get up to Aug 2 and I think on that night, we are not going to have the issue solved,” he said.

If that happens, he said, the U.S. would have to continue paying debt holders or risk major damage in global financial markets. As a result, “we will default on everything else.”

He added: “At that point, I think we’ll all come to our senses.”

First Traitor who wants out: Tim Geithner considers leaving U.S. Treasury

Bloomberg
June 30, 2011

Treasury Secretary Timothy F. Geithner has signaled to White House officials that he’s considering leaving the administration after President Barack Obama reaches an agreement with Congress to raise the federal debt limit, according to three people familiar with the matter.

Geithner said speculation about his departure was being driven by his decision to commute to New York so his son can finish his final year of high school there.

“I live for this work,” he said at the Clinton Global Initiative in Chicago. “It’s the only thing I’ve ever done. I believe in it. We have a lot of challenges as a country. I’m going to be doing it for the foreseeable future.”

Geithner hasn’t made a final decision and won’t do so until the debt-ceiling issue has been resolved, according to one of the people. All spoke on condition of anonymity to talk about private discussions.

The Treasury secretary has said the U.S. risks defaulting on its obligations if Congress doesn’t raise the $14.3 trillion debt ceiling by Aug. 2. The administration and Republicans in Congress are at an impasse in negotiations to raise the limit, which is tied to efforts to cut the nation’s long-term deficit.

Moody’s Investors Service said on June 2 that it expects to place the U.S. government’s Aaa credit rating under review for a possible downgrade if there’s no progress on the debt limit by mid-July. Fitch Ratings said June 21 it would place the U.S. on a negative rating watch if no action is taken by Aug. 2.

Completing the Turnover

An exit by Geithner would complete the turnover in Obama’s original economic team, with Council of Economic Advisers Chairman Austan Goolsbee scheduled to leave in early August to return to the University of Chicago.

That would leave Obama with two key posts to fill as Republicans are seeking to turn the 2012 election into a referendum on Obama’s handling of the economy and as the recovery is slowing. The unemployment rate rose to 9.1 percent in May, according to the Labor Department, and the economy grew at a 1.9 percent pace in the first quarter, according to Commerce Department figures released June 24.

Jen Psaki, a White House spokeswoman, declined to comment.

“Geithner leaving may raise the level of uncertainty for the direction of economic policy, and that is never a positive thing for the markets and the recovery,” said Christopher Sullivan, who oversees $1.7 billion as chief investment officer at the United Nations Federal Credit Union in New York.

‘Shock Value’

Still, he said, it wouldn’t have too much “shock value,” especially if Geithner remains at Treasury until the debt ceiling is settled, “which is the most pressing concern anyone would have.”

Treasuries fell for a fourth day as stocks rose and a measure of U.S. business activity improved. The yield on the 10- year note climbed five basis points, or 0.05 percentage point, to 3.16 percent at 5:14 p.m. in New York.

Investors may be more interested in who would come after Geithner.

“The question in cases like this is always who will be the replacement,” said Jay Mueller, who manages about $3 billion of bonds at Wells Fargo Capital Management in Milwaukee. “You can’t judge if this is good or bad for the market until you see who follows.”

The market was “comfortable” with Geithner because he was “a visible player in trying to blunt the crisis,” Mueller said.

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